18/03/08 "ICH"
-- -- In his famous book, The Collapse of British Power (1972), Correlli
Barnett reports that in the opening days of World War II Great Britain only had
enough gold and foreign exchange to finance war expenditures for a few months.
The British turned to the Americans to finance their ability to wage war.
Barnett writes that this dependency signaled the end of British power.

From their inception, America’s 21st century wars against Afghanistan and Iraq
have been red ink wars financed by foreigners, principally the Chinese and
Japanese, who purchase the US Treasury bonds that the US government issues to
finance its red ink budgets.

The Bush administration forecasts a $410 billion federal budget deficit for
this year, an indication that, as the US saving rate is approximately zero, the
US is not only dependent on foreigners to finance its wars but also dependent
on foreigners to finance part of the US government’s domestic expenditures.
Foreign borrowing is paying US government salaries--perhaps that of the
President himself--or funding the expenditures of the various cabinet
departments. Financially, the US is not an independent country.

The Bush administration’s $410 billion deficit forecast is based on the
unrealistic assumption of 2.7% GDP growth in 2008, whereas in actual fact the
US economy has fallen into a recession that could be severe. There will be no
2.7% growth, and the actual deficit will be substantially larger than $410
billion.

Just as the government’s budget is in disarray, so is the US dollar which
continues to decline in value in relation to other currencies. The dollar is
under pressure not only from budget deficits, but also from very large trade
deficits and from inflation expectations resulting from the Federal Reserve’s
effort to stabilize the very troubled financial system with large injections of
liquidity.

A troubled currency and financial system and large budget and trade deficits do
not present an attractive face to creditors. Yet Washington in its hubris seems
to believe that the US can forever rely on the Chinese, Japanese and Saudis to
finance America’s life beyond its means. Imagine the shock when the day arrives
that a US Treasury auction of new debt instruments is not fully subscribed.

The US has squandered $500 billion dollars on a war that serves no American
purpose. Moreover, the $500 billion is only the out-of-pocket costs. It does
not include the replacement cost of the destroyed equipment, the future costs
of care for veterans, the cost of the interests on the loans that have financed
the war, or the lost US GDP from diverting scarce resources to war. Experts who
are not part of the government’s spin machine estimate the cost of the Iraq war
to be as much as $3 trillion.

The Republican candidate for President said he would be content to continue the
war for 100 years. With what resources? When America’s creditors consider our
behavior they see total fiscal irresponsibility. They see a deluded country
that acts as if it is a privilege for foreigners to lend to it, and a deluded
country that believes that foreigners will continue to accumulate US debt until
the end of time.

The fact of the matter is that the US is bankrupt. David M. Walker, Comptroller
General of the US and head of the Government Accountability Office, in his
December 17, 2007, report to the US Congress on the financial statements of the
US government noted that “the federal government did not maintain effective
internal control over financial reporting (including safeguarding assets) and
compliance with significant laws and regulations as of September 30, 2007.” In
everyday language, the US government cannot pass an audit.

Moreover, the GAO report pointed out that the accrued liabilities of the
federal government “totaled approximately $53 trillion as of September 30,
2007.” No funds have been set aside against this mind boggling liability.

Just so the reader understands, $53 trillion is $53,000 billion.

Frustrated by speaking to deaf ears, Walker recently resigned as head of the
Government Accountability Office.

As of March 17, 2008, one Swiss franc is worth more than $1 dollar. In 1970,
the exchange rate was 4.2 Swiss francs to the dollar. In 1970, $1 purchased 360
Japanese yen. Today $1 dollar purchases less than 100 yen.

If you were a creditor, would you want to hold debt in a currency that has such
a poor record against the currency of a small island country that was nuked and
defeated in WW II, or against a small landlocked European country that clings
to its independence and is not a member of the EU?

Would you want to hold the debt of a country whose imports exceed its
industrial production? According to the latest US statistics as reported in the
February 28 issue of Manufacturing and Technology News, in 2007 imports were 14
percent of US GDP and US manufacturing comprised 12% of US GDP. A country whose
imports exceed its industrial production cannot close its trade deficit by
exporting more.

The dollar has even collapsed in value against the euro, the currency of a
make-believe country that does not exist: the European Union. France, Germany,
Italy, England and the other members of the EU still exist as sovereign nations.
England even retains its own currency. Yet the euro hits new highs daily
against the dollar.

Noam Chomsky recently wrote that America thinks that it owns the world. That is
definitely the view of the neoconized Bush administration. But the fact of the
matter is that the US owes the world. The US “superpower” cannot even finance
its own domestic operations, much less its gratuitous wars except via the
kindness of foreigners to lend it money that cannot be repaid.

The US will never repay the loans. The American economy has been devastated by
offshoring, by foreign competition, and by the importation of foreigners on
work visas, while it holds to a free trade ideology that benefits corporate fat
cats and shareholders at the expense of American labor. The dollar is failing
in its role as reserve currency and will soon be abandoned.

When the dollar ceases to be the reserve currency, the US will no longer be
able to pay its bills by borrowing more from foreigners.

I sometimes wonder if the bankrupt “superpower” will be able to scrape together
the resources to bring home the troops stationed in its hundreds of bases
overseas, or whether they will just be abandoned.

Paul Craig Roberts was Assistant Secretary of the Treasury during President
Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has
held numerous academic appointments, including the William E. Simon Chair,
Center for Strategic and International Studies, Georgetown University, and
Senior Research Fellow, Hoover Institution, Stanford University. He was awarded
the Legion of Honor by French President Francois Mitterrand.